The other way to earn a great multiple: generate cash

08/30/2016By Sammy Abdullah, CFA

Everybody wants to have a SaaS business with recurring revenue contracted for a year or more. Investors prefer this revenue stream to any other given the predictability and stickiness, especially if net retention of customers is high. As result, SaaS businesses on average tend to enjoy higher valuation multiples than businesses that don’t have recurring revenue.

As an entrepreneur looking to maximize valuation, the popularity of SaaS can be discouraging if your business does not lend itself well to a SaaS revenue model. We’ve seen the desire to be a SaaS company cause founders to try and force their business to be a recurring revenue model, even though their business model isn’t naturally a SaaS business. But, there is another way to earn a great multiple: generate real cash flow. Not only will profitability/cash flow yield a strong valuation multiple, but businesses that generate cash don’t need to raise as much money to grow, thereby limiting dilution to founders. Below we compare multiples and cash flow of SaaS and non-SaaS tech businesses.

Looking at the 46 publicly traded SaaS businesses, we see that on median the trailing twelve-month revenue multiple is a lofty 6.16x, with a range of 4.41x to 7.50 over the last 7 quarters. These businesses are growing 30% year over year on median which is attractive, but note the median EBITDA is -$16 million and median free cash flow is only $20 million. These businesses are clearly commanding a strong 6.16x multiple because of the recurring nature of the revenue, not cash flow characteristics.

TTM

TTM

TTM

Capital

Enterprise

Market

Q2 2016

Name

Ticker

Revenue

EBITDA

FCF

Surplus

Value

Cap

Debt

Cash

EV Calc

EV/Rev

2U

TWOU

$177

-$22

-$4

$356

$1,460

$1,670

$0

$188

$1,482

8.38x

Athenahealth, Inc.

ATHN

$1,010

$85

$171

$522

$5,150

$5,000

$295

$134

$5,160

5.11x

Bazaarvoice, Inc.

BV

$200

-$15

$19

$419

$259

$338

$42

$95

$286

1.43x

Benefitfocus, Inc.

BNFT

$212

-$36

-$35

$310

$1,300

$1,230

$75

$68

$1,237

5.82x

Box, Inc.

BOX

$327

-$156

-$38

$871

$1,400

$1,490

$56

$183

$1,363

4.16x

BroadSoft, Inc.

BSFT

$314

$38

$64

$333

$1,200

$1,250

$195

$264

$1,180

3.77x

Castlight Health, Inc.

CSLT

$82

-$77

-$58

$426

$219

$368

$0

$121

$247

3.01x

Cornerstone OnDemand, Inc.

CSOD

$389

-$52

$48

$394

$2,460

$2,470

$234

$267

$2,437

6.26x

Cvent, Inc.

CVT

$211

$8

$46

$219

$1,140

$1,360

$0

$177

$1,183

5.60x

Five9, Inc.

FIVN

$145

-$5

-$1

$181

$713

$722

$44

$58

$707

4.87x

Fleetmatics Group PLC

FLTX

$311

$67

$99

$321

$2,160

$2,330

$23

$194

$2,159

6.95x

Hortonworks, Inc.

HDP

$155

-$219

-$98

$519

$298

$571

$0

$109

$462

2.99x

HubSpot, Inc.

HUBS

$225

-$41

$11

$323

$1,930

$2,020

$1

$117

$1,904

8.47x

IntraLinks Holdings, Inc.

IL

$285

$14

$35

$456

$524

$490

$80

$39

$531

1.87x

Jive Software, Inc.

JIVE

$202

-$14

-$10

$384

$205

$312

$2

$108

$207

1.02x

Lifelock

LOCK

$632

$35

-$38

$532

$1,390

$1,590

$0

$156

$1,434

2.27x

LinkedIn Corp.

LNKD

$3,430

$396

$1,000

$4,589

$23,730

$25,660

$1,150

$3,310

$23,500

6.85x

LivePerson Inc.

LPSN

$232

$16

$36

$287

$360

$420

$0

$52

$368

1.58x

LogMeIN, Inc.

LOGM

$309

$37

$91

$277

$1,940

$2,090

$45

$225

$1,910

6.19x

Marin Software, Inc.

MRIN

$108

-$8

$5

$276

$69

$100

$2

$35

$67

0.61x

Marketo, Inc.

MKTO

$241

-$51

-$4

$345

$1,490

$1,580

$1

$100

$1,482

6.14x

Medidata Solutions, Inc.

MDSO

$421

$52

$96

$366

$2,950

$3,110

$256

$318

$3,048

7.24x

MobileIron, Inc.

MOBL

$158

-$65

-$35

$343

$177

$311

$0

$85

$226

1.43x

NetSuite Inc.

N

$846

-$59

$117

$993

$8,670

$8,740

$286

$408

$8,618

10.18x

New Relic, Inc.

NEWR

$202

-$61

$10

$347

$1,610

$1,800

$0

$196

$1,604

7.95x

Proofpoint, Inc.

PFPT

$313

-$60

$57

$441

$3,090

$3,130

$356

$412

$3,074

9.82x

Qualys, Inc.

QLYS

$182

$43

$75

$223

$912

$1,110

$0

$214

$896

4.93x

RealPage, Inc.

RP

$514

$68

$108

$472

$2,100

$2,010

$124

$47

$2,088

4.06x

RingCentral, Inc.

RNG

$339

-$9

$19

$320

$1,560

$1,690

$17

$148

$1,559

4.60x

salesforce.com, Inc.

CRM

$7,070

$522

$1,930

$5,706

$55,030

$54,780

$2,070

$2,030

$54,820

7.75x

ServiceNow, Inc.

NOW

$1,190

-$91

$98

$1,141

$12,020

$12,380

$491

$807

$12,064

10.14x

Splunk, Inc.

SPLK

$729

-$291

$163

$1,529

$7,290

$8,330

$0

$1,020

$7,310

10.03x

SPS Commerce, Inc.

SPSC

$176

$18

$21

$265

$986

$1,120

$0

$128

$992

5.65x

The Ultimate Software Group, Inc.

ULTI

$700

$66

$120

$523

$6,000

$6,150

$10

$98

$6,062

8.66x

Veeva Systems Inc.

VEEV

$439

$87

$148

$362

$4,730

$5,240

$0

$457

$4,783

10.89x

Wix.com Ltd.

WIX

$241

-$45

$27

$193

$1,440

$1,580

$0

$128

$1,452

6.03x

WorkDay, Inc.

WDAY

$1,260

-$194

$328

$2,248

$14,790

$16,370

$514

$2,080

$14,804

11.75x

Zendesk, Inc.

ZEN

$261

-$78

$15

$512

$2,680

$2,890

$0

$224

$2,666

10.22x

Secureworks

SCWX

$362

-$57

-$18

$588

$1,010

$1,140

$0

$124

$1,016

2.81x

Appfolio, Inc.

APPF

$90

-$8

-$2

$142

$583

$637

$0

$22

$615

6.82x

Atlassian Corporation

TEAM

$457

$9

$130

$461

$5,830

$6,260

$0

$743

$5,517

12.07x

Twilio

TWLO

$219

-$30

-$2

NA

$4,700

$4,920

$0

$261

$4,659

21.23x

Instructure

INST

$92

-$48

-$21

$189

$602

$672

$0

$62

$610

6.64x

Mindbody, Inc

MB

$120

-$24

-$13

$270

$662

$1,020

$16

$88

$948

7.90x

Shopify

SHOP

$282

-$21

$11

$243

$2,990

$3,300

$0

$180

$3,120

11.05x

Xactly

XTLY

$81

-$17

-$7

$151

$397

$424

$15

$46

$393

4.83x

Average

$564

-$6

$102

$675

$4,178

$4,395

$139

$355

$4,179

6.48x

Median

$272

-$16

$20

$362

$1,475

$1,630

$2

$152

$1,482

6.16x

The table below presents 30 tech companies that don’t have SaaS revenue but have the characteristics of a SaaS business (heavy need for developers, no hard assets, tech-focused, etc). We’ve organized them into 4 distinct categories which are Social, Marketplaces, Content, and Gaming. The median revenue multiples of these categories is 7.24x, 4.04x, 4.02x, and 3.48x. While only the Social category has higher revenue multiples than the SaaS companies above, these multiples are nothing to sneeze at and still very attractive. One of the primary reasons these businesses attract such strong multiples is because of the cash generated: median EBITDA for each of the categories is $277 million, $111 million, $151 million, and $621 million respectively. They make the median EBITDA of SaaS companies look ridiculous at -$16 million.

TTM

TTM

TTM

Capital

Enterprise

Market

Q2 2016

Name

Ticker

Revenue

EBITDA

FCF

Surplus

Value

Cap

Debt

Cash

EV Calc

EV/Rev

Social

Facebook

FB

$22,160

$11,080

$11,200

$37,405

$333,860

$356,200

$0

$23,290

$332,910

15.02x

Linkedin

LNKD

$3,430

$396

$1,000

$4,989

$23,630

$25,790

$1,150

$3,310

$23,630

6.89x

Line Corp

LN

$1,300

$159

$206

NA

$9,960

$9,880

$420

$430

$9,870

7.59x

Twitter

TWTR

$2,480

-$4,890

$578

$6,881

$12,160

$13,620

$1,620

$3,590

$11,650

4.70x

Median

$2,955

$277

$789

$6,881

$17,895

$19,705

$785

$3,450

$17,640

7.24x

Marketplaces

Priceline

PCLN

$9,810

$3,710

$3,500

$5,274

$73,430

$71,370

$7,260

$4,370

$74,260

7.57x

eBay

EBAY

$8,790

$3,070

$3,130

$14,627

$35,430

$34,520

$9,050

$8,090

$35,480

4.04x

Sabre

SABR

$3,250

$739

$539

$2,038

$10,740

$7,480

$3,280

$68

$10,692

3.29x

TripAdvisor

TRIP

$1,470

$205

$440

$758

$8,300

$9,080

$92

$853

$8,319

5.66x

Shutterstock

SSTK

$464

$61

$87

$222

$1,850

$2,110

$0

$266

$1,844

3.97x

Match Group

MTCH

$1,120

$289

$229

$441

$4,750

$3,550

$1,210

$174

$4,586

4.09x

IAC

IAC

$3,250

$381

$330

$11,841

$4,990

$4,610

$1,710

$1,330

$4,990

1.54x

Expedia

EXPE

$7,740

$838

$1,430

$8,788

$18,100

$17,220

$3,210

$2,340

$18,090

2.34x

Etsy

ETSY

$321

$30

$35

$411

$1,300

$1,600

$12

$278

$1,334

4.16x

Lending Club

LC

$508

$0

$52

$1,151

$1,570

$2,150

$0

$573

$1,577

3.09x

Angie's List

ANGI

$340

$33

$18

$278

$570

$570

$58

$58

$570

1.67x

Zillow

Z

$741

$7

-$54

$2,985

$6,070

$6,170

$230

$420

$5,980

8.08x

Just-Eat

JSTLF

$403

$111

$124

--

$4,944

$5,120

$1

$177

$4,944

12.26x

GrubHub

GRUB

$418

$94

$51

$768

$2,940

$3,210

$0

$270

$2,940

7.03x

Care.com

CRCM

$151

$0

$14

$283

$241

$297

$0

$56

$241

1.59x

Median

$741

$111

$124

$959

$4,944

$4,610

$92

$278

$4,944

4.04x

Content

Yahoo!

YHOO

$4,890

$151

$1,050

$8,888

$35,830

$40,470

$1,270

$6,380

$35,360

7.23x

Google

GOOGL

$81,760

$26,900

$28,980

$33,694

$478,910

$547,720

$6,270

$76,940

$477,050

5.83x

Yelp

YELP

$629

-$9

$60

$793

$2,580

$2,930

$0

$398

$2,532

4.02x

TrueCar

TRUE

$264

-$34

-$1

$515

$837

$898

$29

$103

$823

3.12x

WebMD

WBMD

$671

$163

$151

$9,259

$1,970

$1,910

$1,040

$1,020

$1,930

2.88x

Netflix

NFLX

$7,620

$314

-$896

$0

$41,640

$40,840

$2,370

$1,830

$41,380

5.43x

Pandora

P

$1,290

-$159

-$118

$1,153

$3,030

$3,160

$243

$293

$3,110

2.41x

Median

$1,290

$151

$60

$1,153

$3,030

$3,160

$1,040

$1,020

$3,110

4.02x

Gaming

Activision Blizzard

ATVI

$5,370

$1,520

$1,640

$10,343

$32,410

$29,750

$5,030

$2,270

$32,510

6.05x

Electronic Arts

EA

$4,460

$1,120

$1,050

$1,349

$22,290

$24,500

$1,120

$3,430

$22,190

4.98x

Take-Two Interactive

TTWO

$1,450

$121

$109

$1,089

$2,780

$3,550

$504

$1,190

$2,864

1.98x

Zynga

ZNGA

$750

-$20

$10

$0

$1,490

$2,340

$0

$868

$1,472

1.96x

Median

$2,955

$621

$579

$1,219

$12,535

$14,025

$812

$1,730

$12,527

3.48x

While SaaS revenue models are highly attractive to investors, if your business isn’t a natural fit for SaaS, don’t force it. Instead focus on getting to profitability as quickly as you can. It’ll earn you a fantastic multiple and you’ll suffer far less dilution as you’ll be able to grow off the cash flow.